What Is ‘Backtesting’ and What Are Its Main Limitations?

Backtesting is the process of applying a trading strategy to historical data to see how it would have performed. It is crucial for proving a strategy's historical viability and optimizing parameters.

Its main limitations include 'overfitting,' where the strategy is too tailored to past data, and 'look-ahead bias,' where future data is inadvertently used in the test.